Gamble of the week: A troubled generics maker

Money is tight for a lot of households in Britain just now, which means lots of them are trying to save money where they can. The spectacular and growing success of discount supermarkets such as Aldi and Lidl is proof of this.

Historically, one of the easiest ways to save money has been to switch from more expensive branded goods to cheaper, unbranded ones. This is one reason why, in recent years, supermarkets have been very keen to promote the quality and relative inexpense of their own-label products as a key point of difference when wooing thrifty customers.

You’d think that these trends would have been good news for McBride (LSE: MCB), which is Europe’s leading manufacturer of private-label household and personal care products (such as dishwasher tablets, washing liquids, bleaches, shampoos and toothpastes).

Unfortunately, that’s not the case. The company always seems to be fighting fires. On the one hand, it has the dubious pleasure of selling to some of the toughest customers in the world – Europe’s supermarkets – who seem constantly to be demanding lower prices. On the other hand, high oil prices have driven up the price of plastics – one of the company’s major costs.

To make matters worse, the manufacturers of branded products have been competing ferociously for customers by heavily promoting their goods in Britain. Faced with the choice of an own-label product and a brand on special offer, many customers have plumped for the latter.

McBride share price chartAs a result of all this, McBride has struggled to grow its profits, and its share price is 25% lower than it was ten years ago. The shares now trade on just over 11 times 2014 forecast profits, while offering a reasonably tempting near-5% dividend yield. If the company can claw back some profits and turn things around, then the shares could be cheap. If not, then they are a classic value trap.

So which is it? There may be some hope for the optimists. Demand for private-label products is growing strongly in eastern and central Europe as well as emerging markets. With take-home pay unlikely to grow by much in the near future, they look like they have a place in a growing number of shopping baskets.

McBride is hacking away at costs and  becoming more efficient. It also looks as if it may have some good-quality washing liquid and dishwashing products to sell. So profits may well recover. Analysts expect earnings per share to grow by nearly 20% next year – if McBride can deliver this, then the shares could be worth a punt.

Verdict: risky buy


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